Can a Landlord Keep Security Deposit for Breaking a Lease?

You have just broken a lease, probably because your tenant violated its terms or the law. For example, they may have paid the rent late too many times or just a portion of it; participated in illegal activities, like selling drugs on, within, or near your property; violated a no-pets clause by keeping a pet or five; affected the safety of others; or caused damage to your property.

Whichever the case, assuming you carried out the lease termination procedure correctly, the next set of rules you’ll want to familiarize yourself with are those concerning security deposits.

To start you off, let’s examine one of the court decisions that clarified circumstances when a landlord is obligated to return a tenant’s deposit and when they are entitled to keep it.

Ms. Sarah Musilla v. Avcan Management Inc.

In this case, Avcan Management (the landlord) accepted Ms. Musilla’s rental application for a one-year lease, in which she paid a deposit equivalent to one month’s rent. But six months prior to the commencement of the tenancy, Ms. Musilla backed out of the arrangement, declined to sign the lease, and went ahead to request her deposit back.

However, the landlord refused to do so and said that they were prepared to give her possession of the property. But she did not accept it.

Avcan Management was unable to re-rent the property until two months after the date of possession.

Ms. Musilla then sued to get her security deposit back. At first, she applied to the Landlord and Tenant Board (LTB). Her application was denied and the case was ruled in favor of the landlord.

Later, she appealed the decision to the Ontario Divisional Court, where the case was ruled in her favor. On top of that, the landlord was asked to pay her legal costs.

Returning Rental Deposits

Section 107 (1) of the Residential Tenancies Act (RTA) states that a landlord shall return the amount paid as deposit in the event possession is not given to the prospective tenant. (Note that the rent deposit cannot be more than the rent for one rental period. For example, if the rent payment is being made monthly, the deposit can’t be more than a single month’s rent).

The Ontario Divisional court held that the above section is limited to fair result. This is where a landlord is unwilling or unable to give possession to the prospective tenant.

Initially, the LTB, in relation to the above case, had held that tenants can’t unliterary break a lease just before the commencement of the tenancy and then request their deposit back (meaning landlords can keep the deposit).

But the Divisional court clarified that there are a variety of situations where Section 107(1) doesn’t apply. In reference to the case above, they argued that what Ms. Musilla signed wasn’t a lease because of its wording. (It was a rental application in which the prospective tenant would execute a lease before moving in).

Therefore, the deposit she gave during rental application wasn’t exactly a security deposit since no tenancy was established. Under the RTA, Avcan Management was, therefore, not authorized to keep the Ms. Musilla’s deposit for refusing to execute the lease.

Another instance worth mentioning where you cannot keep a security deposit is in the case of damages. In Ontario, a landlord can neither collect a damage deposit nor use the tenant’s last month’s rent deposit to cover the damages done to the rental premises.

The same applies to other situations, like the tenant terminating the lease early, abnormal cleaning costs, unpaid utilities, among others.

Usually, what you are expected to do when a tenant damages your rental unit or leaves damage to the entire premises is to serve them a notice of termination and/or request them to cover the damages. If they fail to comply with either of that, you can apply to the LTB and let them establish if there are any damages and what actions are to be taken.

Retaining Rental Deposits

To answer the earlier question, “Can a landlord keep security deposit for breaking a lease?”, the answer is “yes”.

In the above ruling, the court specified circumstances when a landlord can keep a security deposit. Basically, there are instances where section 107(1) doesn’t apply.

Put simply, where a tenant has declined to accept possession of the unit from a willing landlord, you are allowed to retain their security deposit provided the following conditions are met:

The deposit obtained from the tenant was accepted purely as security for/payment of last month’s rent and done in accordance with section 105(1) and 106(10) of the RTA. That implies that any deposit accepted as security for any other tenant obligation disqualifies you from retaining the deposit.

You tried to minimize the damages by re-renting the rental property, but still suffered a loss of rent. However, if you were able to mitigate the damages fully, you will likely have to give the deposit back to the tenant.

After Signing The Lease Agreement

According to the RTA, the rent deposit can only be used for the purpose it was collected for; i.e., to cover rent for the last rental period just before the tenancy comes to an end. That means that if the tenant fails to make the normal rent payment for the last month before they move out, you are allowed to use their deposit (plus any interest on the deposit that you owe them) to offset the final rent payment.

Security Deposits for Keys

Another question we get asked often is, “Can a landlord request for a deposit for keys in Ontario?”

The answer is “yes”, but the following conditions have to be satisfied:

The amount of the deposit should be refundable and not above the actual/expected cost of replacing the key(s) in the event that the tenant fails to return them.

As for when to give the deposit back, this should be done at the end of the tenancy when the tenant hands over the key(s).

Wrap-Up

In light of all we’ve looked at, it would be better as a landlord to always review your tenancy agreement forms regularly just to make sure that they reflect the most recent changes and adjustments in the Residential Tenancies Act.

Let the wordings reflect the deposit’s use, which is solely for the last month’s rent. Also, include a clause about withholding the deposit as security until you have been able to minimize the damages that are as a result of the tenant’s default.

That aside, you can always speak to a legal professional or consult with a top property management company just to have a greater idea of which direction to take when faced with the question, “Can landlord keep security deposit for breaking a lease or residential tenancy?”

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